Prepaid Expenses: Meaning, Journal Entry & Example
Definition
Prepaid expenses are payments made in advance for a benefit that falls partly in the next accounting period — such as a yearly insurance premium paid in January. The unexpired part is shown as a current asset, not an expense.
| Term | Prepaid expenses |
|---|---|
| In Hindi | पूर्वदत्त व्यय |
| Area | Accounting |
| Search phrase | prepaid expenses |
| Try it | Outstanding expenses |
पूर्वदत्त व्यय — हिंदी में अर्थ
पूर्वदत्त व्यय वे भुगतान हैं जो अग्रिम में किए गए और जिनका लाभ अगली लेखा अवधि में भी मिलता है — जैसे जनवरी में दिया गया सालाना बीमा प्रीमियम। अगले साल वाला हिस्सा खर्च नहीं, चालू संपत्ति माना जाता है।
Adjustment entry
At year end: Prepaid Expense A/c Dr; To Expense A/c — for the part that relates to the next year. The P&L then shows only this year's share; the balance sheet shows the prepaid part under current assets (short-term loans and advances or other current assets in Schedule III).
On the first day of the next year the prepaid amount is transferred back to the expense: Expense A/c Dr; To Prepaid Expense A/c.
Typical prepaid items
Insurance on plant and stock, annual maintenance contracts paid upfront, software subscriptions, rent paid in advance, and trade fair stall bookings paid months ahead. Small amounts are often expensed straight away for convenience, but material ones should be split by period.
Example
Fire insurance premium of ₹36,000 for 12 months is paid on 1 January 2026. On 31 March 2026, 3 months (₹9,000) belong to FY 2025-26 and 9 months (₹27,000) to FY 2026-27: Prepaid Insurance A/c Dr ₹27,000; To Insurance A/c ₹27,000.
Related tools and guides
Frequently asked questions
Is a prepaid expense an asset?
Yes — a current asset, because the business has paid for a benefit it has not yet received.
What is the journal entry for prepaid insurance?
Prepaid Insurance A/c Dr; To Insurance A/c — for the unexpired portion at year end.
What is the opposite of a prepaid expense?
An outstanding expense — incurred in the period but not yet paid.
Does GST ITC depend on the prepaid split?
No. Input tax credit is claimed on the tax invoice when received; the prepaid split only affects how the expense is spread in the books.
Related terms
- Accounts receivableAccounts receivable is the money customers owe a business for goods or services already supplied on credit. It is shown as trade receivables (debtors) under current assets.
- Accrual vs cash basis of accountingUnder the accrual (mercantile) basis, income and expenses are recorded when they are earned or incurred, whatever the payment date. Under the cash basis, they are recorded only when cash is actually received or paid.
- Balance sheetA balance sheet is a statement of what a business owns (assets) and what it owes (liabilities and owners' equity) on a particular date. Total assets always equal total equity plus liabilities.
- Cash conversion cycleThe cash conversion cycle (CCC) is the number of days between paying for raw material and collecting cash from the customer for the finished goods: days inventory outstanding plus days sales outstanding minus days payables outstanding.
- Contra entryA contra entry is a transaction between cash and bank accounts of the same business — such as cash deposited into the bank or cash withdrawn for office use — where both the debit and the credit side are cash or bank.
- Contribution marginContribution margin is selling price minus variable cost. It is the amount each sale contributes first towards fixed costs and then to profit; as a percentage of sales it is called the contribution margin ratio or P/V ratio.